During the last 25 years, telecommunication has moved away from government–owned or regulated monopolies toward privatization with competition and oversight by independent regulatory agencies — PCR policies. We present data indicating that PCR has had little impact on the Internet during the last ten years in developed or developing nations, and discuss the reasons for this. We then describe several ways government can go beyond PCR, while balancing needs for next generation technology, decentralized infrastructure ownership, and immediate economic stimulus. We conclude that there is a need for alternatives to the expedient action of subsidizing the current Internet service providers with their demonstrated anti–competitive bent. The decisions we make today will shape telecommunication infrastructure and the industry for decades.

Contents

Since the era of Reagan and Thatcher, there has been a global move from centralized economies toward market economies [1]. We saw the fall of the Soviet Union and the move toward private enterprise in former communist nations and increased de–regulation and trust in markets in capitalist nations. Reagan appointed Alan Greenspan, a free market advocate, to head the Federal Reserve Board and Thatcher privatized telecommunications, gas, steel, electricity and water companies. This trend continued throughout subsequent administrations, but pendulums oscillate. There is now near consensus on the need to increase the government’s economic role. [2].

Privatization, competition and independent regulation (PCR)

Telecommunication has followed a similar pattern during this time. With the support of international organizations such as the International Telecommunication Union (ITU) and World Trade Organization (WTO), telecommunication has been privatized in most nations (Figure 1). They hoped that the ensuing market competition, encouraged by a strong, independent regulatory agency would lead to telecommunication success.

Increased competition was also encouraged by the WTO. In February 1997, 69 WTO member nations agreed to open their telecommunication services markets. The agreement was signed by a mix of industrialized and emerging nations, which, according to the ITU, accounted for over 91 percent of global telecommunication revenues and 82 percent of the world’s telephone main lines in 1995. The agreement was lauded by observers ranging from U.S. FCC Chairman Reed Hundt to Bernard J. Ebbers, president and CEO of WorldCom, who predicted lower prices, accelerated infrastructure rollout and economic growth. By December 1998, there were 90 signatories, and the WTO reported that

Under the stimulus of competition and changing technologies new services are constantly being developed … demand for and issues of licenses have increased dramatically. Competitors are prompting sharp reductions in prices of international and national long distance services … The clear prospect of competition has also further accelerated the pace of innovation, leading to new services that may have been difficult to foresee less than two years ago when the WTO negotiations concluded. [7].

Since even with privatization there were relatively few providers of most telecommunication services, nations have attempted to create independent regulatory agencies to facilitate competition. The number of regulators has increased steadily, as shown in Figure 4.

The optimistic view of market solutions expressed by the WTO became conventional wisdom. For example, the ITU endorsed a PCR policy, stating that [10]:

Privatization without competition is good, but privatization with competition is better.

Creating regulators is good, but giving them adequate powers and independence is better.

Creating a duopoly is good, but allowing open competition is better.

Introducing competition is good, but introducing it at an early stage is better.

PCR does not suffice

Nearly all nations have moved away from government control toward PCR during the last 25 years, but has the PCR promise been fulfilled? There have surely been problems. Most glaring is the “digital divide” among nations. Internet connectivity is nearly non–existent in rural areas of developing nations and, when it is available in urban areas, it is often slow and unreliable, precluding modern “Web 2.0” applications as well as other applications involving audio, video and even still image data. Regardless of how we measure it, there is an immense Internet gap between high and low–income nations (see Table 3).

Relative to per capita GDP, Internet access cost in a low income nation is 37 times that of a high income nation, and the speed and reliability are qualitatively worse, precluding many modern applications. Furthermore, measured in absolute terms, the divide is growing (see Figure 5), and there are similar divides within nations.

There are also problems within the developed nations, as exemplified by the Internet in the U.S. The Internet began in the U.S., and it is still among the leading Internet nations, but it has clearly fallen behind several developed nations. The OECD maintains a Broadband Portal with statistics on prices, services and speed, penetration, usage and coverage in member nations [13]. We see there that, relative to leading Asian and European nations, the U.S. pays a high price for inferior Internet service.

One OECD indicator, fiber connections, is indicative of the problem. The U.S. (and much of Europe) remains focused on copper connections, while several other nations are investing in fiber to the curb, home, building or apartment (see Table 4).

Table 4: Fiber as a percent of total broadband connections, June 2008 [14].

Nation

Percent fiber

Japan

45

Korea

39

Sweden

19

Slovak Republic

18

OECD average

9

Denmark

9

Norway

8

Czech Republic

4

United States

3

There is also a gap in fiber speed, which is typically much slower in the U.S. than in Japan, Korea and Scandinavia. This, combined with relatively high U.S. prices, results in considerably lower cost per Mb/s, and encourages the development of advanced applications in those nations.

The (minimal) effect of PCR

This is not to say that we should return to government owned monopolies, but it leads us to ask what portion of the telecommunication progress we have achieved is attributable to PCR policy and what is attributable to other factors like economic growth, technical progress and the deployment of the Internet?

Precise, definitive answers to such questions are not to be found, but we can make a first approximation by comparing the outcomes in the early WTO signatory nations to those of nations which did not sign. Presumably, the former were the more enthusiastic adopters of PCR policy.

We will use two composite indices — the UNCTAD ICT diffusion index (ICTDI) and the ITU Digital Opportunity Index (DOI) — for dependent variables. The ICTDI is a function of connectivity in a nation and the people’s ability to access and utilize it [15]. It was computed annually from 1997–2004. The DOI combines 11 indicators in measuring ICT opportunity (availability and affordability), infrastructure and utilization. It was computed bi–annually from 2003-2007 [16].

Table 5 compares the change in ICTDI ranks of nations which had signed the WTO telecommunication services accord by December 1998 to those which had not.

As we see, overall, the ranks of signatory nations improved by an average of 2.1 places and the ranks of non–signers fell two places [18]. Sub–Saharan African nations which were not signatories actually fared a bit better than signatories.

Table 6 compares change in DOI ranks of nations which had signed the WTO telecommunication services accord by December 1998 to those which had not.

Here the all–nations impact of signing is even less than with the ICTDI, indicating diminishing benefits — essentially zero — of PCR. The rank changes of low–income and sub–Saharan African nations were actually worse for signatories.

We have treated a nation as either a signatory or not, but the agreement was not monolithic — it dealt with 17 services, and a nation could sign on to liberalization of only a subset. Figure 6 plots the number of services a nation signed up for against its ICTDI change between 1997 and 2003.

Figure 6: Changes in ICTDI rank between 1997–2004 versus the number of services signed for [20].

While the linear trend line slopes down, it is clear that there is no significant correlation between the change in a given nation’s ICTDI rank in the years immediately following signing of the WTO accord and the number of provisions that nations signed for.

There is no doubt that PCR had a positive impact in many nations when state–owned monopolies were first privatized, but this analysis indicates that PCR has run its course, and had little or no effect overall after 1997. While PCR is attractive in theory, it is limited in practice.

The limitations of PCR

The U.S. was an early, enthusiastic proponent of PCR policy, the Internet protocols were invented in the United States, and the U.S. backbone network, funded by the National Science Foundation, was for years the de facto global backbone. In spite of an early lead, the United States is now the fifteenth–ranked OECD nation in terms of broadband connectivity rates [21] and ranked twentieth on the ITU Digital Opportunity Index [22]. Furthermore, prices are higher and connection speeds are lower than in many other nations, service is often asymmetric, thereby discouraging customers from serving information, and terms of service, for example, monthly download caps, may further restrict them.

The failure of the U.S. Internet to keep pace with other developed nations illustrates the limitations of PCR policy. The goal of private telephone and cable companies is to optimize shareholder value and return, regardless of impact on the nation. For example, they lobby against network neutrality stating that, as private companies they should have the right to charge for and utilize their assets — their networks — as they see fit. AT&T CEO Edward Whitacre stated “Now what they would like to do is use my pipes free, but I ain’t going to let them do that because we have spent this capital and we have to have a return on it.” [23]

Mr. Whitacre and others ignore the fact that their assets were often acquired during a period of regulated monopoly. By guaranteeing a fair return on those assets, the public underwrote the risk on the investment, and has rights in determining their use.

The incumbent operators have also abused the public subsidy of capital investment, reneging on promises to invest in infrastructure in return for rate increases and subsidies. For example, Kushnick reports that [24]:

… in the early 1990’s … every Bell company … made commitments to rewire America, state by state. Fiber optic wires would replace the 100–year old copper wiring. The push caused techno–frenzy of major proportions. By 2006, 86 million households should have had a service capable of 45 Mbps in both directions … In order to pay for these upgrades, in state after state, the public service commissions and state legislatures acquiesced to the Bells’ promises by removing the constraints on the Bells’ profits as well as gave other financial perks … The phone companies collected over $200 billion in higher phone rates and tax perks, about $2,000 per household.

As an example, consider the following quote from a 1996 Bell Atlantic press release [25]:

Later this year, Bell Atlantic will begin installing fiber–optic facilities and electronics to replace the predominantly copper cables between its telephone switching offices and customers. Fiber–optics provides higher quality and more reliable telephone services at lower operating and maintenance costs. The company plans to add digital video broadcast capabilities to this “fiber–to–the–curb,” switched broadband network by the third quarter of 1997, and broadband Internet access, data communications and interactive multimedia capabilities in late 1997 or early 1998.

Incumbents received tax breaks and rate increases in return for such promises, but they did not make the promised investments.

While U.S. companies are privately held, competition is imperfect in telecommunication — it is at best oligopolistic. A U.S. home or business typically has only one or two options for Internet connectivity, and some rural areas are only covered by satellite. In pure competition, no single producer has the power to alter the market price, but that is clearly not the case with regard to the Internet. Mobile and fixed Internet connectivity providers can easily monitor each others prices and act to maximize their profits. The uniform increase in text messaging price in the U.S. provides an example [26].

An independent regulator should represent the public interest in trying to countervail monopoly or oligopoly power, but even in a relatively transparent democracy like the U.S., regulators are subject to political pressure and lobbying. For example, the incumbent operators successfully thwarted the intention of the U.S. 1996 Telecommunication Act to create viable, competitive local carriers, and in many states they are lobbying for laws prohibiting municipal governments from providing Internet service.

William Kennard, who, as chairman of the U.S. Federal Communications Commission (FCC) from 1997–2001, was charged with implementing the Telecommunications Act, stated near the end of his term that “all too often companies work to change the regulations, instead of working to change the market,” and spoke of “regulatory capitalism” in which “companies invest in lawyers, lobbyists and politicians, instead of plant, people and customer service.” [27] He went on to remark that regulation is “too often used as a shield, to protect the status quo from new competition — often in the form of smaller, hungrier competitors — and too infrequently as a sword — to cut a pathway for new competitors to compete by creating new networks and services.”

Ironically, Benoit Felton argues that the U.S. incumbents may have inadvertently acted against their own best interests in resisting facility sharing. He presents a simple model showing that take–up rate, not average revenue per user, is the key driver of profitability, and argues that open access drives high take–up rates, to the benefit of the incumbents, competing providers and the community [28].

He supports this view with the following quote from Ad Scheepbouwer, CEO of the Dutch telephone company KPN [29]:

In hindsight, KPN made a mistake back in 1996. We were not too enthusiastic to be forced to allow competitors on our old wireline network. That turned out not to be very wise. If you allow all your competitors on your network, all services will run on your network, and that results in the lowest cost possible per service. Which in turn attracts more customers for those services, so your network grows much faster. An open network is not charity from us, in the long run it simply works best for everybody.

Incumbent telephone and cable companies have the resources to lobby and influence regulators locally as well as at the Federal level. Several such efforts are documented by Cathy Swirbul who writes:

Communities across the United States are working to bring broadband to their residents. Often, they are working with the private sector to provide services. But where private companies are unwilling or unable to meet local needs as fast as the community demands, some municipal governments are considering providing advanced communications networks and services themselves. Incumbent telecommunications companies and cable operators have often responded with fierce opposition and launch efforts to obtain state laws obstructing municipal broadband initiatives. [30]

The Baller Herbst Law Group tracks broadband cases and developments at both the federal and state level [31].

Competition between Internet service providers and their own customers may be more important than limited competition between service providers. The business model of telephone and cable TV companies centers on selling services like telephony, mobile telephony, text messaging, and television rather than application–independent connectivity. It is as if the water utility sold drinking water, dish washing water, garden water, etc. rather than application–independent water. To the extent that they are providers of a specific service, the cable and telephone companies compete with their own customers who provide similar services. This gives them an incentive to discriminate against those customers, which regulators must watch.

We have used the U.S. to illustrate the limitations of PCR policy. The limits on PCR are often more constraining in developing nations. There may be only one connectivity provider, perhaps a private monopoly, and regulators may be even more directly controlled by the political process. But, poverty is even more important. If there is not sufficient demand to justify investment in connectivity infrastructure, it will not occur even if there are many, privately owned, competing service providers and a strong, independent regulator.

Beyond PCR

If PCR policies have reached a point of mixed and diminishing returns, we must couple them with proactive government planning, investment and procurement if we are to close the digital divide or improve connectivity in developed nations.

What might that mean in a developed nation like the U.S., where President Obama has stated “As we renew our schools and highways, we’ll also renew our information super highway,” [32] and a policy goal is to deploy next–generation broadband, to

Work towards true broadband in every community in America through a combination of reform of the Universal Service Fund, better use of the nation’s wireless spectrum, promotion of next–generation facilities, technologies and applications, and new tax and loan incentives. America should lead the world in broadband penetration and Internet access. [33]

First, note that the limit on ubiquitous broadband in developed nations is in access networks, not backbones. This point is made in a study by Nemertes Research which states that:

We continue to project that capacity in the core, and connectivity and fiber layers will outpace all conceivable demand for the near future. However, demand will exceed access line capacity within the next two to four years. Even factoring in the potential impact of a global economic recession on both demand (users purchasing fewer Internet–attached devices and services) and capacity (providers slowing their investment in infrastructure) changes the impact by as little as a year (either delaying or accelerating, depending on which is assumed to have the greater effect). [34]

If economic stimulus were our only goal, we would subsidize current network owners with “shovel ready” projects. A recent report urges such a subsidy, estimating that a US$10 billion investment with current broadband network companies would result in 498,000 jobs being created, and stating [36]:

The government is under pressure to act quickly, but the decisions we make today will affect our telecommunication infrastructure for many decades. We have very little fiber today, but there is no doubt that, in the long run, we will have fiber connections to all urban and many rural homes and buildings. The only question is “Who will own it?”

Network ownership is a strategic consideration along with economic stimulus and technology. Owners of the current network have acted to maximize their own profitability and growth [37]. Crafting regulations to guard against the sort of anticompetitive behavior outlined above has failed. While we should try to craft such regulation, we should also encourage efforts to decentralize ownership of access networks, pushing it out to municipalities, owners of homes and buildings, and wireless Internet service providers in rural areas.

Sweden, the Netherlands, France, Japan, United Kingdom, and Canada have programs to encourage municipal ownership of network infrastructure [38]. In the U.S., Burlington Vermont, Lafayette, Louisiana, and several communities in Utah operate publically owned networks [39]. Sweden has been particularly active in developing municipal networks. For example, Stokab [40], a municipally owned corporation, operates the City of Stockholm’s internal communications networks and has installed 1.2 million kilometers of fiber, reaching every block in the city. The city does not serve retail customers — Internet service providers lease access to the network on a competition–neutral basis, as recommended in a report of the OECD [41]:

Municipal networks can play an important role in enhancing competition in fibre networks. If these develop, governments should encourage them to be open networks, that is providing dark fibre to service providers rather than becoming themselves service providers. Nor should the existence of a municipal network providing dark fibre mean that investment in other fibre networks in that municipality should be prevented.

The Communications Consumer Panel, an advisory body, has compiled a brief report on 40 local broadband projects in the United Kingdom. They range in size from 30 to 550,000 homes [42]. Many are in early stages or lacking funds, but such projects should be considered for stimulus funding. Eventually most of our access networks will use fiber, and we should consider local ownership when that fiber is deployed. Local governments with “shovel ready” plans for fiber networks could be supported immediately.

Home and building owners typically own the water, gas and sewer pipes connecting their structures to utilities. The cost of those pipes and their installation is borne by the owner and accounts for a portion of the value of the structure. The owner is also responsible for maintenance of the pipes, which is generally hired out to plumbers. Ownership and control of access networks could also be pushed out to home and building owners. Wu and Slater discuss this alternative in a recent paper [43], and a test is underway in downtown Ottawa, Canada [44], where fiber has been deployed to serve a 400–home neighborhood, but a service provider has not yet signed on [45].

While customer–owned fiber might be a long–term goal in some cases, customer–owned wireless mesh technology connected to curb–side access points could be deployed quickly if standardization and the rapid ramp up of manufacture and distribution were coordinated. Neighborhood backhaul might be procured by local government or by commercial providers that do not limit the number of connections sharing a point of presence [46].

Fiber may one day be available in sparsely populated rural areas, but today they are often served by wireless Internet service providers [47]. These are small relative to the national telephone and cable companies, and should also be considered for incentives. We should also craft regulation and spectrum policy that facilitates their growth [48].

Rapid economic stimulus should not be the primary consideration in allocating short run broadband subsidy. We can quickly fund municipal and rural broadband initiatives that are planned and ready to go, but we should take time to investigate alternatives to large procurement from and subsidy to incumbent ISPs.

Such investigation need not be expensive or time consuming. We can pursue the strategy used in the design of the initial Internet backbone, NSFNet, by the U.S. National Science Foundation (NSF) and the Department of Defense. Small staffs contracted for and facilitated the work of experts from academia and industry. They addressed both engineering tasks, like the definition of the TCP/IP protocol, and implementation tasks like encouraging and subsidizing the connection of U.S. colleges and universities and research networks in other nations to the backbone network.

Once they knew what they wanted to do, NSF issued RFPs for implementation. The majority of the funding was for procurement of telecommunication and network management services. Procurement for the backbone and Higher Education and International Connection Programs cost US$95 million, but these funds were not spent until the engineering and planning were complete and the decision made to proceed [49].

If our goal is to foster innovation in technology and business models, could we not define, say, 25 such focused studies of one–year duration? Perhaps five of those studies would succeed and be followed by procurement. That would put major spending off for a year, but Paul Krugman, Nobel laureate in economics, warns that the stimulus plan must continue for several years. He recommends “looking broadly at the possibilities for government investment,” and writes “If Mr. Obama drops the ‘jump–start’ metaphor, if he accepts the reality that we need a multi–year program rather than a short burst of activity, he can create a lot more jobs through government investment, even in the near term.” [50]

Like the NSFNet project, these studies would consider both engineering and ownership/business model issues. For example, a study of home ownership of mesh networks would have to address backhaul provision and procurement as well as the design of home network appliances. Another group might be charged with critically studying existing examples of local government infrastructure ownership (including public and private electric power companies) and developing best practices and RFP templates for general use.

We have been discussing strategies to encourage broadband connectivity and economic stimulus in access networks, assuming that adequate backbone networks existed and would continue to expand. This may be the case in developed nations (as was shown in Figure 7), but it is not the case in developing nations. Unlike the U.S., they do not have adequate backbone networks.

The general strategy for developing nations would be to construct backbones with points of presence in all cities and villages, and let the local people be responsible for access connectivity and services. This would recapitulate NSF’s bootstrapping of the Internet by providing a backbone and subsidizing connectivity to universities, which then built local area networks and developed applications. China followed a similar strategy with the government constructing backbone networks and allowing competition among access networks [51]. The construction of ubiquitous national backbones in developing nations would be a daunting task, a grand challenge, but it can be done, and it would benefit both developed and developing nations. We have discussed this further in several papers and presentations [52].

Conclusion

We have seen that the shift toward PCR policy of the last 25 years has left us with problems in developed and developing nations. Comparison of the performance of early PCR adopters with others indicated that PCR is having a marginal impact. While PCR sounds good in theory, regulators have not succeeded in bringing competition to the market place.

The current strategy of privatization with hope for competition under independent regulation has failed in many developed and developing nations. In the U.S., regulators have been unable to create competition and our infrastructure has suffered.

The large broadband incumbents have benefited from public subsidy, have failed to live up to commitments, and have used their power to defeat attempts to create competition.

The U.S. has little fiber in the access network today, but will have fiber to all urban and many rural homes and buildings in the long run. The question is not whether we are going to deploy new infrastructure; the question is “who will own it?”

We need immediate economic stimulus, but that can come from tax cuts and investment in many sectors as well as broadband.

We should take the time to evaluate decentralized alternatives to near–total ownership by the incumbents. Local governments, cooperatives, small ISPs, and home and building owners might own parts of our next generation infrastructure.

This evaluation can be fast and cheap. The work of the National Science Foundation in designing and creating NSFNet and connecting universities, colleges and foreign networks provides an excellent example of a small government staff calling on experts from academia and industry to design a network and a strategy for deploying it, followed by procurement via competitive bid.

We will be living with the fiber and high–speed wireless infrastructure we build today for many decades. We will also be living with its owners.

Figure 8: Summary.

We reach this conclusion at a time of economic stress and resolve to roll back the perceived excesses begun during the Reagan–Thatcher era. Many governments will act to encourage broadband Internet connectivity. We outlined several ways of doing so, and urge serious consideration of alternatives to the expedient action of subsidizing the current cable and telephone companies with their demonstrated anti–competitive bent. The stimulus bill requires the FCC to develop a national broadband plan within one year. We fear the incumbent ISPs will control the plan, find ways to circumvent the best–intentioned attempts at regulation and constraint, and end up owning and exploiting our telecommunication infrastructure for decades. Figure 8 summarizes our conclusions.

39. There are numerous municipally owned wireless access networks throughout the world, see http://www.muniwireless.com/. While valuable for supplemental portable and mobile access, they lack the capacity of cabled networks.

45. Difficulty with finding a retail service provider is due to a law that prevents foreign carriers from operating in Canada country compounded by the government allowing cable and telephone companies to squeeze out the small ISPs. (E–mail note from project director Bill St. Arnaud, January 2009).

46. I participated in a project based on this model in Hermosa Beach, a small city in California, but after the pilot network was installed, the City Council, dropped the project for considerations of cost and under pressure from the cable ISP.